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Liquidation

How the DegenPrime liquidation system works: health monitoring, execution mechanics, and the 3.5% bonus structure.

Overview

When a Smart Loan's health ratio drops below 1.0, it becomes eligible for liquidation. Any user can liquidate the loan by repaying a portion of its debt and receiving the equivalent collateral value plus a 3.5% bonus.

Health Threshold

< 1.0

Loans below this are liquidatable

Liquidation Bonus

3.5%

Reward for liquidators

Fee Split

50/50

Liquidator / Treasury

Health Ratio Monitoring

The health ratio is calculated as the threshold-weighted collateral value divided by total debt. Each asset tier has different LTV thresholds that affect how much collateral value counts toward solvency.

Health RatioStatusAction
> 1.5HealthyNo action needed
1.0 - 1.5WarningConsider adding collateral or repaying debt
< 1.0LiquidatableCan be liquidated by anyone
typescript
// Monitor health ratio for a loan
const healthRatio = await client.readContract({
  address: loanAddress,
  abi: viewFacetAbi,
  functionName: "getHealthRatio",
});

const hr = Number(healthRatio) / 1e18;
if (hr < 1.0) {
  console.log("LIQUIDATABLE! Health ratio:", hr);
}

Finding Liquidation Opportunities

Use the MoltPrime liquidation API to discover loans eligible for liquidation. The endpoint returns opportunities sorted by urgency.

typescript
// Fetch liquidation opportunities from MoltPrime API
const response = await fetch(
  "https://moltprime.io/api/protocol/liquidations"
);
const { data } = await response.json();

for (const opp of data) {
  console.log(
    `Loan: ${opp.loanAddress}`,
    `Health: ${opp.healthRatio}`,
    `Bonus: $${opp.bonus}`,
  );
}

Executing a Liquidation

Important: Liquidation transactions must be wrapped with RedStone price data. The solvency check verifies the loan is indeed below the threshold before allowing liquidation.

typescript
import { WrapperBuilder } from "@redstone-finance/evm-connector";

// 1. Identify debts to repay
const debtTokens = [
  keccak256(encodePacked(["string"], ["USDC"])),
  keccak256(encodePacked(["string"], ["WETH"])),
];
const repayAmounts = [
  500n * 10n ** 6n,     // Repay 500 USDC
  parseEther("0.25"),   // Repay 0.25 WETH
];

// 2. Approve tokens to the loan address
await walletClient.writeContract({
  address: usdcAddress,
  abi: erc20Abi,
  functionName: "approve",
  args: [targetLoanAddress, repayAmounts[0]],
});

// 3. Wrap with RedStone and execute
const wrappedContract = WrapperBuilder
  .wrap(contract)
  .usingDataService({
    dataServiceId: "redstone-arbitrum-prod",
    uniqueSignersCount: 3,
  });

const tx = await wrappedContract.liquidateLoan(
  debtTokens,
  repayAmounts,
);
// You receive collateral + 3.5% bonus

Liquidation Bot Strategy

  1. 1Poll /api/protocol/liquidations every 15 seconds to discover new opportunities.
  2. 2Verify on-chain that the health ratio is still below 1.0 before submitting.
  3. 3Pre-approve repayment tokens to avoid extra transaction latency.
  4. 4Use flashbots or private mempool submission to avoid frontrunning.
  5. 5Immediately swap received collateral to stablecoins to lock in profit.